The Hongkong and Shanghai Hotels, Limited (45) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Welcome to the Hong Kong and Shanghai Hotels 2019 Annual Results Presentation Audio Webcast. Thank you for joining us. The results announcement was posted onto the Stock Exchange website this afternoon. We will first begin with the presentation, followed by the Q&A session. Slides will be displayed alongside the live audio for your convenience. [Operator Instructions] And with that, please allow us to introduce our speakers for today. We have Mr. Clement Kwok, our Chief Executive Officer; Mr. Peter Borer, Chief Operating Officer; Mr. Matthew Lawson, Chief Financial Officer; and Mr. Martyn Sawyer, our Group Director of Properties. We would like to invite our Chief Executive Officer, Mr. Clement Kwok, to begin the presentation.

Thank you, Judy, and good afternoon to everybody calling in. Obviously, I'm talking to you from a very depressed situation in Hong Kong at the moment. We'll try our best to give you an update of what's going on. And I'll start with giving you some key messages. Looking at the 2019 results, our underlying earnings were down by 35%. Now there were some good new spots within those results. But largely, it was not good news. The biggest impact was the social unrest in Hong Kong, which started in late June and really had a significant negative impact on our results in the second half of the year. And underlying our business also were the heightened U.S. and China trade tensions, which we believe affected our business in places like Shanghai and Beijing. Our results were also affected by the first suspension of the Peak Tram as part of the upgrade project. That was planned and expected. But nevertheless, we, of course, lost revenue during the time that the Tram was suspended for that project. The Tram is currently running, but there will be a second phase of suspension later on. So the project is not yet finished. Against the rather volatile hotel results, our residential and office leasing businesses remained solid, and our hotel retail arcades were relatively stable. So as I mentioned, all of that gave rise to a 35% decline in our underlying earnings for the past year which, in our view, given the very difficult environment and the lack of stability in Hong Kong, which is obviously the market where we make the bulk of our earnings, we thought that this result was, if you like, satisfactory and understandable in the light of the environment that we faced. However, bad news as we thought there was in 2019, that is nothing compared to what we're seeing now. Beginning in late January, we started being affected by the coronavirus with the outbreak in China and the impact on the Greater China properties, Hong Kong, Beijing and Shanghai. We were down to single-digit occupancies. And already, that was tough. We were looking at having to manage that situation with that substantial negative impact on travel. And what has happened in the past week to 10 days, as we all know, is that now this has spread into something of global impact. Actually, in your slide, this has a concern about the growing impact of the coronavirus outbreak. That was drafted about 10 days ago. And now, it's full blown, as we know, with travel restrictions, quarantines and closures basically all around the world. As of today, we have temporarily closed The Peninsula in Paris and The Peninsula in Manila. Basically, the situation left us with no choice but to make those decisions. And we -- obviously, we'll keep a watch as to when those properties can reopen again. And of course, a big focus of ours now is on how to manage through this very difficult crisis situation. We're looking at all the costs that can be saved. We have actually -- we have introduced a requested unpaid leave program, which, of course, as people would know, Peninsula is a very good employer. And for us to take the decision to go into an unpaid leave situation is a big decision for us to take. But the current environment leaves us with little choice but to do that. Obviously, we've done a lot of work in terms of our financial position and our liquidity. And I can say to you that those remain sound despite the difficult situation that we find ourselves in. Obviously, all of this is happening, as you all know, within a situation where we have a long-term development program. We are continuing to build the hotels in London, in Istanbul and Myanmar. And our commitment to those projects remain unchanged. It would not make any sense to do anything else because the projects are already well on track and nearing completion within the next couple of years as well as the Peak Tram project. So the company's long-term commitment remains unchanged. Our focus remains unchanged, but obviously, there is critical management of the short-term challenges that we face. Now I'm aware that there will probably be a lot of questions on the current situation and the outlook. But nevertheless, we want to brief you properly on the results of the previous year. And so we're going to go through this pack. And I think we'll do it in a fairly succinct and summarized form to go over the previous year. And then I'm sure there'll be questions, more questions on the current situation. So with that, I'll hand over to Matthew.

Thank you, Clement, and good afternoon, everybody. As Clement has just mentioned, I'll try to run through this relatively quickly because I want to allow sufficient time for Q&A, given sort of the fluidity of the situation that we find ourselves in. So on the slide titled Financial Results, Slide 5, given the adverse operating environment that we found ourselves in, in Hong Kong as well as the planned Peak Tram suspension, we saw revenue down by about 5% to HKD 5.9 billion during the year, which given the challenges that we faced is probably a reasonable outcome. We were able to reduce our overall operating cost by about 1%, which again is not a bad outcome in light of the fact that we did face wage pressures in many of the markets in which we operated in as well as increased costs associated with the support for our 3 hotel projects and the Peak Tram upgrade. Overall, our EBITDA fell by about 17% to HKD 1.4 billion. And then if we exclude nonoperating items, our underlying profit fell 35% to HKD 480 million. The revenue decline that we saw during 2019 was primarily a consequence of the situation in Hong Kong and particularly the tourism-related assets. So our tourism-related assets were substantially affected from June onwards. We saw our flagship Peninsula Hong Kong hotel revenue down by about 18%. The Peak Tower revenue was down by about 26%. Particularly impacted there was the Sky Terrace admissions. And the Peak Tram revenue was down 46%, in part due to the planned suspension as a result of the project we're doing, but also because of the unrest and lower tourism arrivals in Hong Kong. Our leasing portfolio in Hong Kong remained relatively solid. In fact, we saw revenue growth at The Repulse Bay, our residential complex. And generally, the hotel arcade and office assets were stable through the year. Looking at our earnings contribution by division. Hotels continue to remain the main contributor to the group's results. The hotel division was down 18% primarily due to lower contribution from Peninsula Hong Kong, but we also experienced some softness in New York during the year. The hotel arcade leasing, as I've already mentioned, was relatively stable across most of our arcades. And combined, the EBITDA margin for the hotels division decreased by about 3 percentage points to 18%. The commercial properties division contributes about 35% of our combined EBITDA. And we saw the decline there -- we saw declines there of about 10%, and that's primarily due to the Sky Terrace, as I'd previously mentioned, as well as some turnover rent here in Hong Kong. The combined EBITDA margin for the commercial properties division decreased by about 4 percentage points to 56%. The clubs and services division was likewise impacted by the Peak Tram suspension and lower tourist arrivals as well as softer retail sales at Peninsula Merchandising. The overall impact of all of this was a combined EBITDA margin for the company of about 24%, which is down 3 percentage points from last year. Looking at our overall cash flow. Net cash generated from operating activities after lease payments in 2019 was about HKD 1.2 billion, of which HKD 564 million was used to fund capital expenditure on our existing assets. Our operating cash flows still comfortably cover all of our existing asset CapEx requirements. We spent about HKD 1.2 billion on new projects during the year. That's after netting out any minority contribution to the shareholder on Peninsula Yangon. So our net cash flow after CapEx on existing assets generally is used to fund Peninsula Yangon and Peninsula Istanbul developments as well as repay any revolver debt. Overall, our gross borrowings increased by about HKD 430 million, and our overall net cash flow -- outflow after taking all capital expenditures into consideration was about HKD 794 million. Our cash -- our total cash flow will remain negative in the near term as we continue to ramp up investments in the new hotel projects before we start to recognize London residential sales expected in 2021. Looking at our capital structure. Despite all of the increased investments that we're making in these new projects, we did finish the year with relatively solid balance sheet and cash flow metrics. Our overall net borrowings over the period increased by about 15%. And we saw net debt-to-total assets increased to about 13%, again, predominantly due to the London -- The Peninsula London development project. But despite these higher borrowings, at the end of last year, our cash interest cover remained at about 10x. Looking forward, we do continue to have significant capital commitments, and our gearing levels will increase. But what's important to note is that the funding for these capital commitments has been secured. We are reporting that we have increased the budget for our London project. We've previously reported GBP 650 million. That looks like it's increasing to about GBP 800 million. And subsequent to the year-end, we secured additional committed facilities for that. In light of the current environment, we obviously continue to monitor our overall debt and cash flow positions closely. So quickly on capital commitments. As at 31 December 2019, our capital commitments amounted about HKD 7.7 billion, which represents about 15% of our group's total asset base. The group's undrawn committed facilities at the end of 2019 was HKD 6.9 billion. However, as mentioned, subsequent to the balance sheet date, we obtained further committed facilities of HKD 1.8 billion, giving us about HKD 8.7 billion in liquidity, which sufficiently covers our current capital commitments. Finally, from me, in terms of the dividend, we declared a final dividend of HKD 0.09 per share, which brings the total for the year to HKD 0.13 per share, and the decrease is really a reflection of the decline in property -- profitability that we saw during the year, and we have kept our payout ratio largely consistent with prior years. With that, I would like to hand over to Peter and Martyn to talk about the operations.

Thank you, Matthew. Good afternoon, ladies and gentlemen. 2019 was a difficult year for our hotel business, and the situation is presently being exacerbated by the coronavirus outbreak. As always, our utmost priority is the safety of our guests and staff. And despite a disruptive operating environment, we always strive to keep the brand at a high level. The Peninsula Hong Kong had an extremely challenging year. We were the market leader for the first half of 2019 in terms of RevPAR and average rate, but this position slipped in the second half. We ended the year with a RevPAR down of 34%, and food and beverage was impacted, to a lesser extent, bringing the total revenue decrease of about 18%. We had government travel advisories in place for many countries, including key segments of the United States and Japan, which severely impacted tourist arrivals into Hong Kong and to the Peninsula. In response, we offered special staycation rates for the local market and incentives to corporate clients and partners as well as implementing very stringent cost control measures. Peninsula Office Tower was stable and had an occupancy of 96%. The Peninsula Arcade occupancy was 84%, and the overall environment in Hong Kong for luxury retail remained soft. The Peninsula Shanghai, despite being the rate leader in the city, The Peninsula Shanghai reported a softer 2019 in terms of average rate and RevPAR due to intense competition and increased supply of luxury hotels. The domestic Chinese Mainland market continued to be our largest revenue driver, and we also saw an increase in arrivals from Russia and the Middle East. However, the U.S.-China trade war negatively impacted corporate travel and group business to the hotel. The Peninsula shopping arcade was 94% occupied. The Peninsula Beijing reported positive revenue growth primarily driven by food and beverage performance. The RevPAR declined slightly as the ongoing U.S.-China trade war negatively impacted business from that country. The hotel celebrated its 30th anniversary in April of 2019, and the shopping arcade was occupied at 67%. Peninsula Tokyo reported a strong year in rooms, posting double-digit growth in average rate and increased RevPAR. And -- however, food and beverage revenue was soft compared to the same period last year due to weak demand from the bedding market and the general MICE market. The Peninsula Bangkok experienced mixed results in 2019, impacted by a slower economy and uncertainty over the country's first election since 2014. Extensive roadworks adjacent to our property in relation to a new monorail station also negatively impacted our food and beverage business. Also in the long term, this will benefit our hotel. The Peninsula Manila. The Philippines experienced a 7% increase in foreign tourist arrivals year-on-year. The Peninsula Manila reported positive growth in occupancy in RevPAR during this year despite intense and increasing competition. We commenced a room refurbishment program in April 2019 with refreshed decor in our guest rooms and suites. And the Peninsula's most updated in-house technology, we also introduced a new club lounge. But as Clement mentioned, unfortunately, we now have to take the decision, led by the government decision, to close the hotel for the next few days and weeks. The Peninsula New York had a challenging room environment in 2019. There's a slight decline in RevPAR. The Middle East market segment was impacted by the U.S. administration's travel restrictions and geopolitical tensions. The hotel's food and beverage performance improved in 2019. The Peninsula Chicago reported a stable year, achieving market leader position in RevPAR and average rates despite significant new supply. Z Bar, which opened in 2018, has helped to drive revenue in the hotel and continues to grow an influential social media following. It was awarded the World's Best Hotel Bar by Forbes Travel Guide. The Peninsula Beverly Hills reported softer rates, occupancy and RevPAR, which was partly due to the decreasing arrivals of Middle East in guests and from the United Kingdom, increased supply of luxury accommodation in the Beverly Hills area and an unseasonably cold weather impacting leisure travel. We have implemented cost control measures to counteract the first -- the soft first year -- half in addition to undertaking new marketing initiatives. And The Peninsula Paris continued to be negatively impacted by the gilets jaunes protests. This impacted our results in the early part of 2019. Also, business improved in the remainder of the year. Overall, The Peninsula Paris reported improved RevPAR occupancy. Also, we slow -- we saw a slight decline in average rate. We have focused very hard on driving groups in MICE business, and we were honored to welcome several diplomatic groups, including a very high level state visit. And again, this hotel unfortunately had to be closed yesterday until about the 5th of April or slightly thereafter. And now I will hand over to Martyn to talk about the commercial properties and club services.

Thank you, Peter, and good afternoon, everyone. Starting with Repulse Bay. The Repulse Bay complex reported a positive year with a 4% increase in revenue despite an overall weaker luxury leasing market in the second half of the year. The residential maintained a positive average occupancy in the mid-90s. The shopping arcade was 94% occupied for most of the year. Moving to The Peak. The Peak Tower was fully leased for most of the year, although rental revenue only slightly declined. Overall revenue decreased by 26% due to a significant decline in the visitors to the Sky Terrace as a result of the social unrest in Hong Kong and the planned suspension of the Peak Tram. St. John's Building was fully let in 2019, and office renewals were generally stable with positive rental reversions. Moving to Vietnam. The landmark in Ho Chi Minh City reported 99% occupancy in the office portfolio and increased revenue for the service departments despite intense competition in the city. And in Paris, our building 21 avenue Kléber was fully leased in 2019. Moving to our clubs and services division. The Peak Tram from April to July this year was temporarily suspended to enable us to carry out construction work as part of the previously announced upgrade project. Revenue decreased by 46% due to the impact of the suspension, combined with the social unrest in the second half, which significantly impacted tourist arrivals in Hong Kong. The upgrade is scheduled to complete in 2021, and the full cost of the HKD 684 million upgrade project is being fully funded by HSH. The upgrade project will result in covered, temperature-controlled queuing and waiting areas with entertainment features for up to 1,300 passengers. The new Tram cars will be able to carry 210 passengers instead of the 121 -- 120 at present, and visitors' waiting time will be significantly reduced. For Peninsula Merchandising, our revenue declined by about 3%, with retail sales impacted by the weak market in Hong Kong. Our current focus is on business expansion and driving brand awareness across Greater China. We opened 2 Peninsula Boutiques in Shenzhen and Guangzhou. Looking forward to 2020, we will continue to open new boutiques in the Chinese Mainland as well as entering the Japanese market. Moving to the U.S. Quail Lodge & Golf Club. Revenue increased by 4% year-on-year due to a successful marketing strategy to drive last minute bookings, online travel agency promotions as well as improved golf membership sales and golf rounds. In 2019, we welcomed more than 5,000 visitors to our motorsports gathering, bringing the Peninsula brand to the attention of leading car enthusiasts. I will now hand over to Clement to talk about our development projects and company outlook.

Thank you, Martyn. Obviously, by far, our largest project is The Peninsula London, and we put a lot of time and effort into this. Generally, progress is good. We have the topping out ceremony for the first core of the building in June 2019, although the below-ground excavation and structural works will continue for some time. We have commenced some private marketing of the apartments in the development and are pleased that we have already exchanged some contracts. The hotel is currently scheduled to be completed in the third to fourth quarter of 2021. Now as Matthew has mentioned, the project budget was increased from the previous GBP 650 million to approximately GBP 800 million. And what I would say is that this increase, a significant part of it was due to increasing the size and functionality of the hotel. We added an additional basement, and we have additional revenue earning areas as a result of that. However, I would also say that we have also been subject to some higher costs in some areas. There have been some unfavorable foreign currency movements, some costs associated with mitigating the supply chain from the Brexit risks. There have been some additional costs because of requests from buyers of the residential to do more, but then that is counteracted by increased selling prices. And generally, I think the tendering in London has been quite difficult in terms of the tender prices coming in. So we are -- we have the increased budget, which, of course, we're trying to manage very tightly, too. The Peninsula Istanbul had encountered some unforeseen site conditions and challenges, particularly with the heritage building that caused some delays, although we have seen much better progress in the past 6 months. Things are now progressing much better and we are still looking at a completion in -- around late 2021. The works on the site vary because there are 4 buildings there. There are some buildings where the basements were being completed. There are some that were into the superstructure already, but I can say that we've also started fitting out in some of the buildings as well. In Peninsula Yangon, I think we've reported before that there was a collapse of a small portion of the heritage building. But we've now taken action to rectify that issue, and much of that delay has been mitigated. We are still completing the share in core construction works by getting ready for fit-out. The project, we are expecting also to be completed in late 2021 with a budget on track. But I would say that this is a project that now looks to be affected by the coronavirus situation, because a large part of the supply chain comes from China. Having said that, of course, in the past week or 2, and we haven't had time to evaluate all of the impacts yet, there may well be impacts in other supply chains in places like Europe, in Turkey and so on. So definitely, there is some risks of the coronavirus affecting the program for some of our projects. The final section relates to our vision. And I think those of you who've been with us before are already aware of what we do. Basically, it all sums up into we are very long term. We invest for the future. We continuously look to invest and enhance our property assets. We're developing, as mentioned, the new hotels in London, Istanbul and Yangon as well as the Peak Tram upgrade. In terms of driving business, we focus on our brand, we focus on our guest engagement. We focus on the guest journey and how to make that guest journey more interesting for people. For instance, last year, we launched the Art in Resonance program, which really brought some new elements to -- for our guests to enjoy. We have done a lot of work in the past few years on the whole area of digital marketing and social media. And we have got various programs, which are to do with driving business in those areas. At the same time, we manage our risks. We have a group risk management committee that reviews the major risks that we look at. We monitor our principal risks and we try and manage them the best we can. Ultimately, one of the biggest defenses is to maintain a prudent level of gearing so that we could withstand unexpected shocks, such as the one we're facing at the moment. We're very people-oriented company. I think everybody knows this. We have a strong employee culture. We have good loyalty. Generally, star service periods are very long. And we had an employee engagement survey throughout the group last year with extremely favorable results. And we also focus on sustainability, as we'll see on the next slide. We had set Vision 2020 a number of years ago. We have delivered over 89% of the goals, and we'll be over 90% by the time that vision is completed, which is a very good result, because by nature, visions are rather aspirational and there's no product-setting targets, which are just very easy to make. So we've done a good job. Specific highlights in 2019. We launched a global approach against modern slavery. We developed a seafood marketplace tool with the environmental group, Teng Hoi, to increase seafood traceability. We implemented a policy banning the purchase of endangered species, reflecting the spirit of the convention on international trade in endangered species of wild fauna and flora. And we're one of the first hotel companies to do this. And we transitioned about 40% of the single-use plastics in our operations. The big thing we're working on now is that with Vision 2020 coming to a close, we're working on our next strategy for the period leading up to 2030. And we have been spending a lot of time identifying what are the key issues that require significant and urgent attention and how we can adapt those so that we can make the right impact in terms of what we do in our business. Actually, we recently had a brainstorming on this, which was very stimulating. And there are a number of ideas as to how we can make our Vision 2030 more wide-reaching, more ambitious and reaching out more to external parties as well. So on outlook, which is the final slide, it's all coronavirus at the moment. The impact is significant, substantial. You've heard of hotels being closed. Several of our hotels are down to single-figure occupancies. I don't think there's anything that's sort of more than around 25% occupied at the moment. We're really into full crisis handling mode, and a lot is going to depend on how we come out of that crisis. The only thing I would -- the only point I would make is that our financial position remains strong. We have been very carefully watching our liquidity, our financial planning. And also, the only other point to make is that we are a very long-term-looking company. As my Chairman, Sir Michael, says, if you want to invest for 100 years, you know that there will be ups and downs during the 100 years. And if you don't have the staying power to do that, don't invest for 100 years. Now perhaps we had not envisaged a down as much as the current one, but that philosophy surely must apply. So thank you very much.